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The choice between arm's-length and relationship debt: evidence from e-loans

  • Sumit Agarwal
  • Robert Hauswald

Using a unique sample of comparable online and in-person loan transactions, we study the determinants of arm's-length and inside lending focusing on the differential information content across debt types. We find that soft private information primarily underlies relationship lending whereas hard public information drives arm's-length debt. The bank's relative reliance on public or private information in lending decisions then determines trade-offs between the availability and pricing of credit across loan types. Consistent with economic theory, relationship debt leads to informational capture and higher interest rates but is more readily available whereas the opposite holds true for transactional debt. In their choice of loan type, lender switching, and default behavior firms, however, anticipate the inside bank's strategic use of information and act accordingly.

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Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-08-10.

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Date of creation: 2008
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Handle: RePEc:fip:fedhwp:wp-08-10
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  16. Berger, Allen N & Udell, Gregory F, 1995. "Relationship Lending and Lines of Credit in Small Firm Finance," The Journal of Business, University of Chicago Press, vol. 68(3), pages 351-81, July.
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  18. Roberto Fuentes & Rubén Hernández-Murillo & Gerard Llobet, 2007. "Strategic online-banking adoption," Working Papers 2006-058, Federal Reserve Bank of St. Louis.
  19. Inderst, Roman & Mueller, Holger M., 2006. "A lender-based theory of collateral," IMFS Working Paper Series 6, Institute for Monetary and Financial Stability (IMFS), Goethe University Frankfurt.
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